priority sector lending in india

7/27/2019 Priority Sector Lending in india

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CHAPTER 1- INTRODUCTION OF PRIORITY SECTOR LENDING

1.1 BACK GROUND OF PRIORITY SECTOR LENDING

At a meeting of the National Credit Council held in July 1968, it was emphasized

that commercial banks should increase their involvement in the financing of priority

sectors, viz., agriculture and small scale industries. The description of the priority

sectors was later formalized in 1972 on the basis of the report submitted by the

Informal Study Group on Statistics relating to advances to the Priority Sectors

constituted by the Reserve Bank in May 1971. On the basis of this report, the Reserve

Bank prescribed a modified return for reporting priority sector advances and certain

guidelines were issued in this connection indicating the scope of the items to be

included under the various categories of priority sector. Although initially there was no

specific target fixed in respect of priority sector lending, in November 1974 the banks

were advised to raise the share of these sectors in their aggregate advances to the

level of 33 1/3 percent by March 1979.

At a meeting of the Union Finance Minister with the Chief Executive Officers ofpublic sector banks held in March 1980, it was agreed that banks should aim

at raising the proportion of their advances to priority sector to 40 percent by March

1985. Subsequently, on the basis of the recommendations of the Working Group on

the Modalities of Implementation of Priority Sector Lending and the Twenty Point

Economic Programme by Banks (Chairman: Dr. K. S. Krishnaswamy), all commercial

banks were advised to achieve the target of priority sector lending at 40 percent of

aggregate bank advances by 1985. Sub-targets were also specified for lending to

agriculture and the weaker sections within the priority sector. Since then, there have

been several changes in the scope of priority sector lending and the targets and sub-

targets applicable to various bank groups. The guidelines were last revised in the year

2007 based on the recommendations made in September 2005 by the Internal

Working Group of the RBI (Chairman: Shri C. S. Murthy). The Sub-Committee of


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the Central Board of the Reserve Bank (Chairman: Shri Y. H. Malegam)

constituted to study issues and concerns in the Micro Finance institutions (MFI)

sector, inter alia, had recommended review of the guidelines on priority sector lending.

Accordingly, Reserve Bank of India in August 2011 set up a Committee to re-examine the existing classification and suggest revised guidelines with regard to

Priority Sector lending classification and related issues (Chairman: M V Nair).

The recommendations of the committee were placed in the public domain inviting

public comments. The recommendations of the Committee were examined based on

the interface with various stakeholders and in the light of the comments /

suggestions received from Government of India, banks, financial institutions, Non-

Banking Financial Companies, Associations of industries, public and Indian Banks

Association; and revised guidelines were issued on July 20, 2012 in supersession of

guidelines mentioned in the master circular on priority sector lending dated July 2,

2012. The revised guidelines are operational with effect from July 20, 2012. The

priority sector loans sanctioned under the guidelines issued prior to this date will

continue to be classified under priority sector till maturity/renewal.

1.2 MEANING AND DEFINITION OF PRIORITY SECTOR LENDING

Some areas or fields in a country depending on its economic condition or government

interest are prioritized and are called priority sectors i.e industry, agriculture. These may

further be sub divided. Banks are directed by the Apex bank of the country that loans

must be given on reduced interest rates with discounts to promote these fields. Such

lending is called priority sector lending.

Definition as per RBI- Priority sector refers to those sectors of the economy which

may not get timely and adequate credit in the absence of this special dispensation.

Typically, these are small value loans to farmers for agriculture and allied activities,

micro and small enterprises, poor people for housing, students for education and other

low income groups and weaker sections.


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CHAPTER 2-IMPACT OF PRIORITY SECTOR

2.1 IMPACT OF PRIORITY SECTOR ON PUBLIC SECTOR BANKS

A study was conducted by Ganesan (1998)* to analyze the impact of public sector

banks (PSBs) and priority sector advances. The analysis shows that the priority

sector credit outstanding had increased by 80 times. In the year 1969, the

outstanding was Rs.765.11 crores. It steadily rose to 61794 crores in 1995, thus

registering an average annual growth rate of 19.20 percent. The growth rate

declined from 20.26 percent in the first phase of nationalization 1969-80 to 4.50

percent in the post reform period. However the non-priority sector credit

outstanding went up 44 times by 1995 from what it was in December 1996, thusit recorded a compounded growth rate of 16.38 percent per annum. It was observed

that the advances of PSBs to agricultural sector had increased from 6.95

percent at the time of nationalization (1969) to 15.13 percent in 1980, but the share

declined to 12.83 percent in March 1991. In March 1997, the percentage of agriculture

sector was 18 percent, but the data revealed that PSBs could not achieve the target-

set by RBI. It was observed that in respect of the small scale sector, the percentage

had increased to 16.60 in 1997 from 9.78 at the end of 1969. In the case of other

sectors PSB s performed well in June, 1980, (13.77%), whereas during the post-

reform period, the ratio of other priority sectors was below 10%. The study concluded

that the advances still did not actually reach the so called neglected sections in the

priority sectors, viz., small and marginal farmers, tiny units, small scale sectors,

small retail traders and the educated unemployed. Therefore, there is an urgent need

to redefine the concept of priority sectors

(source- Ganesan, P., Public Sector banks and Priority Sector Advances- A critical

Analysis, South Economist, Vol.37, No.8,August 15, 1998, pp: 12-16)


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Table- 1.1 Priority Sector Advances by Various Banks in India.

Years as on March Public sector banks Private sector Banks Foreign sector banks

2003 1,46,546 (43.0) 21,550 (38.1) 11,835 (34.1)

2004 1,71,484 (43.5) 24,184 (38.4) 9,936 (34.6)

2005 1,99,786 (41.2) 36,648 (44.1) 14,555 (33.1)

2006 2,44,456 (43.6) 48,920(47.3) 17,960 (34.9)

2007 3,07,046 (42.8) 69,886 (43.6) 23,843(35.3)

2008 4,09,748 (40.3) 1,06,586(42.8) 30,439(34.4)

2009 5,21,376(39.7) 1,44,549(42.9) 37,831(33.4)

2010 6,10,450(44.7) 1,64,068(47.8) 50,254(39.5)

2011 7,20,083(42.5) 1,90,207(46.8) 55,453(34.3)

2012 8,64,564 (41.7) 2,15,552 (46.0) 60,290 (35.1)

(source- RBI BULLETIN YEARLY)

2.2 IMPACT OF PARIORITY SECTOR ON AGRICULTURAL AND

RURAL DEVELOPMENT

Although agriculture contributes only 21% ofIndias GDP, its importance inthe countrys

economic, social, and political fabric goes well beyond this indicator. The rural areas are

still home to some 72 percent of the Indias 1.2 billion people, a large number of whom

are poor. Most of the rural poor depend on rain-fed agriculture and fragile forests for

their livelihoods.

The sharp rise in food grain production during Indias Green Revolution of the 1970s

enabled the country to achieve self-sufficiency in food grains and stave off the threat of


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famine. Agricultural intensification in the 1970s to 1980s saw an increased demand for

rural labor that raised rural wages and, together with declining food prices, reduced rural

poverty.

Sustained, although much slower, agricultural growth in the 1990s reduced rural poverty

to 26.3 percent by 1999/00. Since then, however, the slowdown in agricultural growth

has become a major cause for concern. Indias rice yields are one-third ofChinas and

about half of those in Vietnam and Indonesia. With the exception of sugarcane, potato

and tea, the same is true for most other agricultural commodities.

The Government of India places high priority on reducing poverty by raising agricultural

productivity. However, bold action from policymakers will be required to shift away from

the existing subsidy-based regime that is no longer sustainable, to build a solid

foundation for a highly productive, internationally competitive, and diversified agricultural

sector.

(source - www.worldbank.org)


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CHAPTER 3- RBI GUIDELINES FOR PRIORITY SECTOR LENDING

EXTRACT FROM RBI MASTER CIRCULAR NO- RBI/2013-14/107

RPCD.CO.PLAN.BC9/04.09.01/2013-14

SECTION-I

I.CATEGORIES UNDER PRIORITY SECTOR

1) Agriculture

2) Micro and small Enterprise

3) Education

4) Housing

5) Export credit

6) Others

The eligible activities under the above categories are specified in paragraph III

3.1 TARGETS/ SUB-TARGETS FOR PRIORITY SECTOR

(i) The targets and sub-targets set under priority sector lending for domestic

and foreign banks operating in India are furnished below:

Table no 1.2

CATEGORIESDOMESTICCOMMERCIAL/FOREIGN BANKSWITH 20 AND ABOVE BRANCHCES

FOREIGN BANKS WITHLESS THAN 20BRANCHES

Total priority

sector

40 percent of adjusted net bank credit

(ANBC defined in sub paragraphbelow) or credit equivalent amount of

off balance sheet exposure,

whichever is higher.

32 percent of ANBC or

credit equivalent amountof off-balance sheet

exposure, whichever is

higher


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Total agriculture

18 percent of ANBC or credit

equivalent amount of off-balance

sheet exposure, whichever is higher.

Of this, indirect lending in excess of

4.5% of ANBC or credit equivalent

amount of off-balance sheet

exposure, whichever is higher, will not

be reckoned for computing

achievement under 18 percent target.

However , all agricultural loans under

the categories direct and indirect will

be reckoned in computing

achievement under the overall priority

sector target of 40 percent of ANBC or

credit equivalent amount of off-

balance sheet exposure, whichever is

higher.

No specific target. Forms

part of total priority sector

target.

Micro and smallenterprises(MSE)

Advances to micro and all small

enterprises sector will be reckoned incomputing achievement under the

overall priority sector target of 40

percent of ANBC or credit equivalent

amount of off-balance sheet

exposure, whichever is higher.

40 percent of total advances to micro

and small enterprises sector should

go to micro (manufacturing)

enterprises having investment in plant

and machinery up to Rs.10 lakh and

micro (service) enterprises having


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(iii) The current years targets for priority sectors and sub-targets will be computed

based on Adjusted Net Bank Credit (ANBC) or credit equivalent of Off-Balance Sheet

Exposures of preceding March 31st. The outstanding priority sector loans as on

March 31st of the current year will be reckoned for achievement of priority sector

targets and sub-targets. For the purpose of priority sector lending, ANBC denotes the

outstanding Bank Credit in India [(As prescribed in item No.VI of Form A (Special

Return as on March 31st) under Section 42 (2) of the RBI Act, 1934] minus bills

rediscounted with RBI and other approved Financial Institutions plus permitted non

SLR bonds/debentures in Held to Maturity (HTM) category plus other investments

eligible to be treated as part of priority sector lending (eg. investments in securitised

assets). Deposits placed by banks with NABARD/SIDBI/NHB, as the case may be,in lieu of non-achievement of priority sector lending targets/sub-targets, though

shown under Schedule 8 'Investments' in the Balance Sheet at item I (vi) 'Others',

will not be reckoned for ANBC computation. For the purpose of calculation of credit

equivalent of off-balance sheet exposures, banks may be guided by the master

circular on exposure norms issued by our Department of Banking Operations and

Development.

3.2 COMPUTATION OF ADJUSTED NET BANKING CREDIT

Table no1.3

Bank Credit in India (As prescribed in item No.VI of Form A (Special

Return as on March 31st) under Section 42 (2) of the RBI Act, 1934.

I

Bills Rediscounted with RBI and other approved Financial Institutions II

Net Bank Credit (NBC)* III(I-II)

Bonds/debentures in Non-SLR categories under HTM category + otherinvestments eligible to be treated as priority sector.

IV

ANBC III+IV

For the purpose of priority sector only. Banks should not deduct / net any amount


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like provisions, accrued interest, etc. from NBC.

It has been observed that some banks are subtracting prudential write off at

Corporate/Head Office level while reporting Bank Credit as above. In such cases it

must be ensured that bank credit to priority sector and all other sub-sectors so written

off should also be subtracted category wise from priority sector and sub-target

achievement.

All types of loans, investments or any other item which are treated as eligible for

classifications under priority sector target/sub-target achievement should also form part

of Adjusted Net Bank Credit.

(iv) The targets for Micro Enterprises within the Micro and Small Enterprises segment

(MSE) will be computed with reference to the outstanding credit to MSE as on

preceding March 31st.

3.3 DESCRIPTION OF THE CATEGORIES UNDER PRIORITY SECTOR

1. Agriculture

1.1Direct Agriculture

1.1.1 Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability

Groups (JLGs), i.e. groups of individual farmers, provided banks maintain

disaggregated data on such loans], directly engaged in Agriculture and Allied Activities,

viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture (up

to cocoon stage).

(i) Short-term loans to farmers for raising crops.

(ii) Medium & long-term loans to farmers for agriculture and allied activities (e.g.

purchase of agricultural implements and machinery, loans for irrigation and other

developmental activities undertaken in the farm, and development loans for allied


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activities).

(iii) Loans to farmers for pre and post-harvest activities, viz., spraying, weeding,

harvesting, sorting, grading and transporting of their own farm produce.

(iv) Loans to farmers up to50 lakh against pledge/hypothecation of agricultural

produce (including warehouse receipts) for a period not exceeding 12 months,

irrespective of whether the farmers were given crop loans for raising the produce or

not.

(v) Loans to small and marginal farmers for purchase of land for agricultural

purposes.

(vi) Loans to distressed farmers indebted to non-institutional lenders.

(vii) Bank loans to Primary Agricultural Credit Societies (PACS), Farmers Service

Societies (FSS) and Large-sized Adivasi Multi Purpose Societies (LAMPS) ceded

to or managed/ controlled by such banks for on lending to farmers for agricultural and

allied activities.

(viii) Loans to farmers under Kisan Credit Card Scheme.

(ix) Export credit to farmers for exporting their own farm

produce.

1.1.2 Loans to corporate including farmers' producer companies of individual

farmers, partnership firms and co-operatives of farmers directly engaged in

Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-

keeping and sericulture (up to cocoon stage) up to an aggregate limit of 2 crore per

borrower for the following activities:

(i) Short-term loans to farmers for raising crops.


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(ii) Medium & long-term loans to farmers for agriculture and allied activities (e.g.

purchase of agricultural implements and machinery, loans for irrigation and other

developmental activities undertaken in the farm, and development loans for allied

activities).

(iii) Loans to farmers for pre and post-harvest activities, viz., spraying, weeding,

harvesting, grading and sorting.

(iv) Export credit for exporting their own farm

produce.

1.2. Indirect agriculture

1.2.1. Loans to corporates including farmers' producer companies of individual

farmers, partnership firms and co-operatives of farmers directly engaged in

Agriculture and Allied Activities, viz., dairy, fishery, animal husbandry, poultry, bee-

keeping and sericulture (up to cocoon stage)

(i) If the aggregate loan limit per borrower is more than Rs . 2 crore in respect of (1.1.2)

of this circular, the entire loan should be treated as indirect finance to agriculture.

(ii) Loans up to Rs.50 lakh against pledge/hypothecation of agricultural produce

(including warehouse receipts) for a period not exceeding 12 months,

irrespective of whether the farmers were given crop loans for raising the produce or

not.

1.2.2 Bank loans to Primary Agricultural Credit Societies (PACS), Farmers Service

Societies (FSS) and Large-sized Adivasi Multi Purpose Societies (LAMPS) other than

those covered under paragraph III (1.1) (vii) of this circular.


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1.2.3 Other indirect agriculture loans

(i) Loans up to Rs.5 crore per borrower to dealers /sellers of fertilizers, pesticides,

seeds, cattle feed, poultry feed, agricultural implements and other inputs.

(ii) Loans for setting up of Agriclinics and Agribusiness

Centres.

(iii) Loans up to R s . 5 crore to cooperative societies of farmers for disposing of the

produce of members.

(iv) Loans to Custom Service Units managed by individuals, institutions or

organizations who maintain a fleet of tractors, bulldozers, well-boring equipment,threshers, combines, etc., and undertake farm work for farmers on contract basis.

(v) Loans for construction and running of storage facilities (warehouse, market

yards, godowns and silos),including cold storage units designed to store agriculture

produce/products, irrespective of their location.

(vi) Loans to MFIs for on-lending to farmers for agricultural and allied activities as per

the conditions specified in paragraph VIII of this circular.

(vii) Loans sanctioned to NGOs, which are SHG Promoting Institutions, for on-

lending to members of SHGs under SHG-Bank Linkage Programme for agricultural and

allied activities. The all inclusive interest charged by the NGO/SHG promoting entity

should not exceed the Base Rate of the lending bank plus eight percent per annum.

(viii) Loans sanctioned to RRBs for on-lending to agricultural activities.


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Advances to agricultural sectorTable no 1.4

Reported End of

MarchPublic Sector Banks Private sector Banks

Amount outstanding % of Net BankCredit

Amount outstanding % of Net Bank Credit

2006 70,501 14.5 9,924 10.9

2007 84,435 15.1 14,730 12.7

2008 1,09,917 15.3 21,636 12.3

2009 1,55,220 15.3 36,712 13.6

2010 2,02,614 15.4 52,034 12.7

2011 2,49,397 17.5 58,567 15.4

2012 2,98,211 17.2 76,062 15.9

(source- Yearly RBI bulletin )

2.Micro and Small Enterprises

The limits for investment in plant and machinery/equipment for manufacturing /

service enterprise, as notified by Ministry of Micro Small and Medium

Enterprises, vide, S.O.1642(E) dated September 9, 2006 are as under-

Table no- 1.5

Manufacturing sector

Enterprises Investment in plant and machinery

Micro Enterprises Do not exceed twenty five lakh rupees

Small Enterprises More than twenty five lakh rupees but doesnot exceed five crore rupees

Service Sector

Enterprises Investment in equipment

Micro Enterprises Does not exceed ten lakh rupees

Small Enterprises More than ten lakh rupees but does not exceedtwo crore rupees


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Bank loans to micro and small enterprises both manufacturing and service are

eligible to be classified under priority sector as per the following:

2.1.Direct Finance

2.1.1.Manufacturing Enterprises

The Micro and Small enterprises engaged in the manufacture or production of goods

to any industry specified in the first schedule to the Industries (Development and

regulation) Act, 1951 and as notified by the Government from time to time. The

manufacturing enterprises are defined in terms of investment in plant and machinery.

2.1.1.1 Loan for food and agro processing

Loans for food and agro processing will be classified under Micro and Small

Enterprises, provided the units satisfy investments criteria prescribed for Micro and

Small Enterprises, as provided in MSMED Act, 2006.

2.1.2 Service Enterprises

Bank loans up to 5 crore per unit to Micro and Small Enterprises engaged in

providing or rendering of services and defined in terms of investment in equipment

under MSMED Act, 2006.

2.1.3. Export credit to MSE units (both manufacturing and services) for

exporting of goods/services produced/rendered by them.

2.1.4 Khadi and Village Industries Sector (KVI)

All loans sanctioned to units in the KVI sector, irrespective of their size of operations,

location and amount of original investment in plant and machinery. Such loans will be

eligible for classification under the sub-target of 60 percent prescribed for micro

enterprises within the micro and small enterprises segment under priority sector.


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Table No: 1.6 Credit to Micro and Small Enterprises

Year Public

sector bank

Private Bank Foreign bank All schedule

commercial banks

% credit to

Net bank

credit.

2009 1,02,550 13,136 11,637 1,27,323 7.2

2010 1,51.137 46,912 15,489 2,13,538 11.6

2011 1,90,968 47,916 18,188 2,57,072 11.4

2012 2,45,700 52,917 22,194 3,64,001 13.4

(Source- RBI BULLETIN YEARLY)

2.2 Indirect Finance

(i) Loans to persons involved in assisting the decentralized sector in the supply of

inputs to and marketing of outputs of artisans, village and cottage industries.

(ii) Loans to cooperatives of producers in the decentralized sector viz. artisans village

and cottage industries.

(iii) Loans sanctioned by banks to MFIs for on-lending to MSE sector as per the

conditions specified in paragraph VIII of this circular.

3. Education

Loans to individuals for educational purposes including vocational courses up to Rs.

10 lakh for studies in India and Rs. 20 lakh for studies abroad.

4. Housing

(i) Loans to individuals up to Rs. 25 lakh in metropolitan centres with population above

ten lakh and Rs 15 lakh in other centres for purchase/construction of a dwelling

unit per family excluding loans sanctioned to banks own employees.


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(ii) Loans for repairs to the damaged dwelling units of families up to Rs.2 lakh in

rural and semi- urban areas and up to Rs. 5 lakh in urban and metropolitan areas.

(iii)Bank loans to any governmental agency for construction of dwelling units or for

slum clearance and rehabilitation of slum dwellers subject to a ceiling of Rs. 10 lakh

per dwelling unit

(iv) The loans sanctioned by banks for housing projects exclusively for the

purpose of construction of houses only to economically weaker sections and low

income groups, the total cost of which do not exceed Rs10 lakh per dwelling unit. For

the purpose of identifying the economically weaker sections and low income

groups, the family income limit of Rs.120000 per annum, irrespective of the

location, is prescribed.

(v) Bank loans to Housing Finance Companies (HFCs), approved by NHB for their

refinance, for on-lending for the purpose of purchase/construction/reconstruction of

individual dwelling units or for slum clearance and rehabilitation of slum dwellers,

subject to an aggregate loan limit of Rs. 10 lakh per borrower, provided the allinclusive interest rate charged to the ultimate borrower is not exceeding lowest lending

rate of the lending bank for housing loans plus two percent per annum.

The eligibility under priority sector loans to HFCs is restricted to five percent of

the individual banks total priority sector lending, on an ongoing basis. The maturity

of bank loans should be co-terminus with average maturity of loans extended by HFCs.

Banks should maintain necessary borrower-wise details of the underlying portfolio.

5. Export Credit

Export Credit extended by foreign banks with less than 20 branches will be

reckoned for priority sector target achievement.


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6. Others

6.1. Loans, not exceeding Rs. 50000 per borrower provided directly by banks to

individuals and their SHG/JLG, provided the borrowers household annual income in

rural areas does not exceed Rs. 60000 and for non-rural areas it should not exceed Rs.

120000.

6.2. Loans to distressed persons [other than farmers-already included under III (1.1)

(vi)] not exceeding Rs. 50000 per borrower to prepay their debt to non-institutional

lenders.

6.3. Loans outstanding under loans for general purposes under General Credit Cards

(GCC). If the loans under GCC are sanctioned to Micro and Small Enterprises, such

loans should be classified under respective categories of Micro and Small Enterprises.

6.4. Overdrafts, up to Rs. 50000 (per account), granted against basic banking/saving

accounts provided the borrowers household annual income in rural areas does not

exceed Rs. 60000 and for non-rural areas it should not exceed Rs. 120000.

6.5. Loans sanctioned to State Sponsored Organizations for Scheduled Castes/Scheduled Tribes for the specific purpose of purchase and supply of inputs to and/or

the marketing of the outputs of the beneficiaries of these organizations.

6.6. Loans sanctioned by banks directly to individuals for setting up off-grid solar and

other off-grid renewable energy solutions for households.


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3.4 WEAKER SECTIONS

Priority sector loans to the following borrowers will be considered under Weaker

Sections category:-

(a)Small and marginal farmers.

(b) Artisans, village and cottage industries where individual credit limits do not

exceed Rs. 50000.

(c) Beneficiaries of Swarnjayanti Gram Swarozgar Yojna (SGCY) now National Rural

Livelihood Mission (NRLM)

(d) Scheduled Caste and Scheduled Tribes.

(e) Beneficiaries of Differential Rate of Interest (DRI) SCHEME.

(f) Beneficiaries Under Swarna Jayanti Shahari Rozgar Yojana(SJSRY)

(g) Beneficiaries Under The Scheme For Rehabilitation of Manual Scavengers(SRMS)

(h) Loan to Self Help Groups.

(i)Loans to Distressed Farmers Indebted To Non-Institutional Lenders.

(j) Loans to distressed persons other than farmers not exceeding Rs. 50000 per

borrower to prepay their debt to non-institutional lenders.

(k) Loans to individual women beneficiaries up to Rs. 50000 per borrower.

(l) Loans sanctioned under (a) to (k) above to persons from minority communities as

may be notified by Government of India from time to time.

In States, where one of the minority communities notified is, in fact, in majority, item (l)will cover only the other notified minorities. These States/Union Territories are Jammu

& Kashmir, Punjab, Meghalaya, Mizoram, Nagaland and Lakshadweep.


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3.5 INVESTMENTS BY BANKS IN SECURITISED ASSETS

(i) Investments by banks in securitised assets, representing loans to various

categories of priority sector, except 'others' category, are eligible for

classification under respective categories of priority sector (direct or indirect)

depending on the underlying assets provided:

(a) The securitised assets are originated by banks and financial institutions and are

eligible to be classified as priority sector advances prior to securitisation and fulfil the

Reserve Bank of India guidelines on securitisation.

(b) The all inclusive interest charged to the ultimate borrower by the originating entity

should not exceed the Base Rate of the investing bank plus 8 percent per annum.

The investments in securitised assets originated by MFIs, which comply with the

guidelines of this circular are exempted from this interest cap as there are separate

caps on margin and interest rate.

(ii)Investments made by banks in securitised assets originated by NBFCs,

where the underlying assets are loans against gold jewellery, are not eligible for

priority sector status.

3.6 INTER BANK PARTICIPATION CERTIFICATION BOUGHT BY

BANKS

Inter Bank Participation Certificates (IBPCs) bought by banks, on a risk sharing basis,

shall be eligible for classification under respective categories of priority sector,provided the underlying assets are eligible to be categorized under the respective

categories of priority sector and the banks fulfill the Reserve Bank guidelines on

IBPCs.


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3.7 BANK LOANS TO MFIS FOR ON-LENDING

a) Bank credit to MFIs extended on, or after, April 1, 2011 for on-lending to individuals

and also to members of SHGs / JLGs will be eligible for categorization as priority

sector advance under respective categories viz., agriculture, micro and small

enterprise, and 'others', as indirect finance, provided not less than 85% of total

assets of MFI (other than cash, balances with banks and financial institutions,

government securities and money market instruments) are in the nature of qualifying

assets. In addition, aggregate amount of loan, extended for income generating

activity, is not less than 70% of the total loans given by MFIs.

b) A qualifying asset shall mean a loan disbursed by MFI, which satisfies the

following criteria:

(i) The loan is to be extended to a borrower whose household annual income in

rural areas does not exceed Rs. 60000 while for non-rural areas it should not exceed

Rs. 120000.

(ii) Loan does not exceed Rs. 35000 in the first cycle and Rs.50000 in the subsequent

cycle.

(iii) Total indebtedness of the borrower does not exceed Rs. 50000.

iv) Tenure of loan is not less than 24 months when loan amount exceed Rs. 15000 with

right to borrower of prepayment without penalty.

(v) The loan is without collateral.

(vi) Loan is repayable by weekly, fortnightly or monthly installments at the choice of

the borrower.

c) Further, the banks have to ensure that MFIs comply with the following caps on

margin and interest rate as also other pricing guidelines, to be eligible to classify


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these loans as priority sector loans.

(i) Margin cap at 12% for all MFIs. The interest cost is to be calculated on average

fortnightly balances of outstanding borrowings and interest income is to be

calculated on average fortnightly balances of outstanding loan portfolio of qualifying

assets.

(ii) Interest cap on individual loans at 26% per annum for all MFIs to be calculated

on a reducing balance basis.

(iii) Only three components are to be included in pricing of loans viz., (a) a processing

fee not exceeding 1% of the gross loan amount, (b) the interest charge and (c)

the insurance premium.

(iv) The processing fee is not to be included in the margin cap or the interest cap of

26%.

(v) Only the actual cost of insurance i.e. actual cost of group insurance for life,

health and livestock for borrower and spouse can be recovered; administrative charges

may be recovered as per IRDA guidelines.

(vi)There should not be any penalty for delayed

payment.

(vii) No Security Deposit/ Margin are to be taken.

d) The banks should obtain from MFI, at the end of each quarter, a Chartered

Accountants Certificate stating, inter-alia, that (i) 85% of total assets of the MFI are

in the nature of qualifying assets, (ii) the aggregate amount of loan, extended

for income generation activity, is not less than 70% of the total loans given by the

MFIs, and (iii) pricing guidelines are followed.


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SECTION-II

3.8 PENALTIES FOR NON-ACHIEVEMENT OF PRIORITY SECTOR

TARGETS/SUB TARGETS

1. Domestic scheduled commercial banks- contributed by banks to rural infrastructure

development fund.

1.1 Domestic scheduled commercial banks having shortfall in lending to priority sector

target (40 per cent of ANBC or credit equivalent amount of Off-Balance Sheet

Exposure, whichever is higher) and / or agriculture target (18 per cent of ANBC or

credit equivalent amount of Off- Balance Sheet Exposure, whichever is higher) shall be

allocated amounts for contribution to the Rural Infrastructure Development Fund (RIDF)

established with NABARD. The concerned banks will be called upon by NABARD, on

receiving demands from various State Governments, to contribute to RIDF.

1.2 The corpus of a particular tranche of RIDF is decided by Government of India every

year. Fifty per cent of the corpus shall be allocated among the domestic commercial

banks having shortfall in lending to priority sector target of 40 per cent of ANBC or

credit equivalent amount of Off-Balance Sheet Exposure, whichever is higher, on a pro-

rata basis, and fifty per cent of the corpus shall be allocated among the banks having

shortfall in lending to agriculture target of 18 per cent of ANBC or credit equivalent

amount of Off-Balance Sheet Exposure, whichever is higher, on a pro-rata basis.

The amount of contribution by banks to a particular tranche of RIDF will be decided in

the beginning of the financial year.

1.3 The interest rates on banks contribution to RIDF shall be fixed by Reserve Bank of

India from time to time.

1.4 Details regarding operationalisation of the RIDF such as the amounts to be

deposited by banks, interest rates on deposits, period of deposits etc., will be


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communicated to the concerned banks separately by August of each year to enable

them to plan their deployment of funds.

2. FOREIGN BANKS DEPOSIT BY FOREIGN BANKS WITH SIDBI

2.1 The foreign banks having shortfall in lending to stipulated priority sector target/sub-

targets will be required to contribute to Small Enterprises Development Fund (SEDF) to

be set up by Small Industries Development Bank of India (SIDBI).

2.2 The corpus of SEDF shall be decided by Reserve Bank of India on a year to year

basis. The tenor of the deposits shall be for a period of three years or as decided by

Reserve Bank from time to time. Fifty per cent of the corpus shall be contributed by

foreign banks having shortfall in lending to priority sector target of 32 per cent of ANBC

or credit equivalent amount of Off- Balance Sheet Exposure, whichever is higher, on a

pro-rata basis, and fifty per cent of the corpus shall be contributed by foreign banks

having aggregate shortfall in lending to SSI sector and export sector of 10 per cent and

12 per cent respectively, of ANBC or credit equivalent amount of Off-Balance Sheet

Exposure, whichever is higher, on a pro-rata basis.

2.3 The concerned foreign banks will be called upon by SIDBI, as and when required

by them, to contribute to SEDF, after giving one months notice.

2.4 The interest rates on foreign banks contribution to SEDF shall be fixed by the

Reserve Bank of India from time to time.


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SECTION-III

3.9 COMMON GUIDELINES FOR PRIORITY SECTOR LOANS

1. Banks should follow the following common guidelines prescribed by the Reserve

Bank for all categories of advances under the priority sector.

2. PROCESSING OF APPLICATIONS

2.1 Completion of Application Forms

In case of Government sponsored schemes such as SGSY, the concerned projectauthorities like DRDAs, DICs, etc. should arrange for completion of application forms

received from borrowers. In other areas, the bank staff should help the borrowers for

this purpose.

2.1 Completion of Application Forms

In case of Government sponsored schemes such as SGSY, the concerned project

authorities like DRDAs, DICs, etc. should arrange for completion of application formsreceived from borrowers. In other areas, the bank staff should help the borrowers for

this purpose.

2.2 Issue of Acknowledgement of Loan Applications

Banks should give acknowledgement for loan applications received from weaker

sections. Towards this purpose, it may be ensured that all loan application forms

have perforated portion for acknowledgement to be completed and issued by the

receiving branch. Each branch may affix on the main application form as well as

the corresponding portion for acknowledgement, a running serial number. While

using the existing stock of application forms which do not have a perforated portion for

acknowledgement is separately given, care should be taken to ensure that the serial

number given on the acknowledgement is also recorded on the main application. The


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loan applications should have a check list of documents required for guidance of the

prospective borrowers.

2.3 Disposal of Applications

(i) All loan applications up to a credit limit of Rs. 25,000/- should be disposed of within

a fortnight and those for over Rs. 25,000/-, within 4 weeks.

(ii) All loan applications for SSI up to a credit limit of Rs. 25,000/- should be disposed of

within 2 weeks and those up to Rs. 5 lakh within 4 weeks, provided the loan

applications are complete in all respects and are accompanied by a 'check list'.

2.4 Rejection of Proposals

Branch Managers may reject applications (except in respect of SC/ST) provided the

cases of rejection are verified subsequently by the Divisional/Regional Managers. In

the case of proposals from SC/ST, rejection should be at a level higher than that of

Branch Manager.

2.5 Register of Rejected Applications

A register should be maintained at the branch, wherein the date of receipt,sanction/rejection/disbursement with reasons therefore, etc., should be recorded.

The register should be made available to all inspecting agencies.

3. MODE OF DISBURSEMENT OF LOAN

With a view to providing farmers wider choice as also eliminating undesirable

practices, banks may disburse all loans for agricultural purposes in cash which will

facilitate dealer choice to borrowers and foster an environment of trust. However,

banks may continue the practice of obtaining receipts from borrowers.


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4. REPAYMENT SCHEDULE

4.1 Repayment programme should be fixed taking into account the sustenance

requirements, surplus generating capacity, the break-even point, the life of the

asset, etc., and not in an "ad hoc" manner. In respect of composite loans,

repayment schedule may be fixed for term loan component only.

4.2As the repaying capacity of the people affected by natural calamities gets severely

impaired due to the damage to the economic pursuits and loss of economic assets, the

benefits such as restructuring of existing loans, etc. as envisaged under our circular

RPCD.CO.PLFS.NO. BC16/05.04.02/2006-07 dated August 9, 2006 may be extended

to the affected borrowers.

5. RATES OF INTEREST

5.1 The rates of interest on various categories of priority sector advances will be as

per RBI directives issued from time to time.

5.2 (a) In respect of direct agricultural advances, banks should not compound theinterest in the case of current dues, i.e. crop loans and instalments not fallen due in

respect of term loans, as the agriculturists do not have any regular source of income

other than sale proceeds of their crops.

(b) When crop loans or installments under term loans become overdue, banks can add

interest to the principal.

(c) Where the default is due to genuine reasons banks should extend the period of loan

or reschedule the installments under term loan. Once such a relief has been extended,

the overdues become current dues and banks should not compound interest.

(d) Banks should charge interest on agricultural advances in respect of long duration


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crops, at annual rests instead of quarterly or longer rests, and could compound the

interest, if the loan/installment becomes overdue.

6. PENAL INTEREST

6.1.1The issue of charging penal interests that should be levied for reasons such as

default in repayment, non-submission of financial statements, etc. has been left to the

Board of each bank. Banks have been advised to formulate policy for charging such

penal interest with the approval of their Boards, to be governed by well accepted

principles of transparency, fairness, incentive to service the debt and due regard to

difficulties of customers.

6.1.2 No penal interest should be charged by banks for loans under priority sector

up to Rs 25,000 as hitherto. However, banks will be free to levy penal interest for

loans exceeding Rs 25,000, in terms of the above guidelines.

7. SERVICE CHARGES / INSPECTION CHARGES

7.1.1 No service charges/inspection charges should be levied on priority sector loansup to Rs. 25,000/-.

7.1.2 For loans above Rs. 25,000/- banks will be free to prescribe service charges with

theprior approval of their Boards, in terms of circular No. DBOD.Dir.BC.86/03.01.00/99-

2000 dated September 7, 1999.


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8. INSURANCE AGAINST FIRE AND OTHER RISKS

8.1 Banks may waive insurance of assets financed by bank credit in the following cases:

Table no- 1.6

No. Category Type of Risk Type of Assets

(a) All categories of priority sector advancesup to and inclusive of Rs. 10,000/-

Fire & otherrisks

Equipment and current

assets

(b) Advances to SSI sector up to and inclusive

of Rs. 25,000/- by way of -

Composite loans to artisans, village and

cottage industries

All term loans

Working capital where these are against

non-hazardous goods

Fire

Fire

Fire

Equipment and currentassetsEquipment

Current Assets

8.2 Where, however, insurance of vehicle or machinery or other equipment/assets

is compulsory under the provisions of any law or where such a requirement is

stipulated in the refinance scheme of any refinancing agency or as part of a

Government-sponsored programmes such as SGSY, insurance should not be

waived even if the relative credit facility does not exceed Rs.10,000/- or Rs.

25,000/-, as the case may be.

9. PHOTOGRAPHS OF BORROWERS

While there is no objection to taking photographs of the borrowers for purposes of

identification, banks themselves should make arrangements for the photographs and

also bear the cost of photographs of borrowers falling in the category of Weaker

Sections. It should also be ensured that the procedure does not involve any delay in

loan disbursement.

10. DISCRETIONARY POWERS

All Branch Managers of banks should be vested with discretionary powers to sanction

proposals from weaker sections without reference to any higher authority. If there are

difficulties in extending such discretionary powers to all the Branch Managers, such


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powers should exist at least at the district level and arrangements be ensured that

credit proposals on weaker sections are cleared promptly.

11. MACHINERY TO LOOK INTO COMPLAINTS

There should be machinery at the regional offices to entertain complaints from the

borrowers if the branches do not follow these guidelines, and to verify periodically that

these guidelines are scrupulously implemented by the branches.

12. AMENDMENTS

These guidelines are subject to any instructions that may be issued by the RBI from

time to time.

3.10 CLARIFICATION

(i) Contingent liabilities/off-balance sheet items do not form part of priority sector target

achievement. Banks should declassify such accounts with retrospective effect, where

a contingent liability/off- balance sheet item is treated as a part of priority sector target

achievement.

(ii) Off-balance sheet interbank exposures are excluded for computing CreditEquivalent of off -Balance Sheet Exposures for the priority sector targets.

(iii) The term all inclusive interest includes interest (effective annual interest),

processing fees and service charges.

(iv)Banks should ensure that loans extended under priority sector are for approved

purposes and the end use is continuously monitored. The banks should put in place

proper internal controls and systems in this regard.


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CHAPTER 4- THE SCOPE OF PRIORITY SECTOR LENDING

4.1 THE SCOPE OF PRIORITY SECTOR LENDING EXTENDING

The Reserve Bank of India, eased norms for priority sector lending by banks and also

expanded the scope for distributing loans to agriculture and weaker sections of the

society.

The additions and amendments will be operational with effect from July 20, the RBI

said in a notification.

The central bank allowed banks to include loans to corporates, including farmers'

producer companies of individual farmers, partnership firms and co-operatives of

farmers directly engaged in agriculture and allied activities dairy, fishery, animal

husbandry, poultry, bee-keeping and sericulture (up to cocoon stage) up to an

aggregate limit of Rs.2 crore per borrower, to be considered as apriority sector lending.

Further short-term loans for raising crops, which include traditional/non-traditional

plantations, horticulture and allied activities, would be included in the priority sector.

Loans for pre-harvest and post-harvest activities, spraying, weeding, harvesting,

grading and sorting will be included in the priority sector. Now priority sector lending

would also include export credit for exporting own farm produce.

During the interaction the RBI Governor had with bankers on July 31, 2012 in

connection with the first quarter review of Monetary Policy 2012-13, certain concerns

were raised by the banks on the revised priority sector guidelines.

Discussions were held with CMD/CEOs of select banks and also with priority sector

heads of select banks. Based on the feedback received, it has been decided to make

certain additions and amendments, in the guidelines on priority sector issued on July

20, the RBI added.


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Bank loans to Micro and Small Enterprises (MSEs) engaged in providing or rendering of

services will be eligible for classification as direct finance to the MSE sector under the

priority sector up to an aggregate loan limit of Rs.2 crore per borrower/unit, provided

they satisfy the investment criteria for equipment as defined under the MSMED Act,

2006.

In the housing sector, bank loans to any governmental agency for construction of

dwelling units or for slum clearance and rehabilitation of slum dwellers subject to a

ceiling of Rs.10 lakh per dwelling unit would be considered as priority sector lending.

For the purpose of identifying the economically weaker sections and low income

groups, the family income limit of Rs.1.120 lakh per annum, irrespective of location, is

prescribed, it added.

Bank loans to housing finance companies (HFCs) approved by the NHB for their

refinance for on-lending for the purpose of purchase, construction and reconstruction

of individual dwelling units or for slum clearance and rehabilitation of slum dwellers,

subject to an aggregate loan limit of Rs.10 lakh per borrower, would come under priority

sector lending.

However, the RBI stipulated that all inclusive interest rate charged to the ultimate

borrower would not exceed the lowest lending rate of the lending bank for housing loans

plus 2 per cent per annum. The eligibility under priority sector loans to HFCs is

restricted to 5 per cent of the individual banks total priority sector lending, on an

ongoing basis.

The RBI also asked banks to ensure that loans extended under the priority sector are

for approved purposes and the end use is continuously monitored. The banks should

put in place proper internal controls and systems in this regard, it added.

(The above article was published in THEHINDU news paper on 17 oct 2012)


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CHAPTER 5- NEED OF A NEW APPROACH TO PRIORITY SECTOR

LENDING

5.1 A NEW APPROACH TO PSL IS NEEDED IF IT IS TO SERVE ITS

INTENDED PURPOSES

The governing considerations behind PSL were partly economic and developmental,

with the objective of aligning credit flows with Plan priorities, and partly social, to ensure

employment growth and equitable distribution of credit, particularly among small and

vulnerable groups of population.

The PSL norms were also intended to compensate for inadequacy of budgetaryresources to finance such activities directly by the government. Therefore, PSL also

represents a form of quasi-fiscal operations of the government. The origins of PSL can

be traced to social control of banks initiated in 1968 through amendments to banking

laws, but culminating in the crucial political decision of nationalization of major

commercial banks in July 1969.

We try to address three aspects of PSL first, the level; second, the economic or

sectoral dimensions and scope; and third, the social and equity aspects. We argue that

a new approach to PSL is needed if it is to serve its intended purposes.

COMPLEX DIMENSIONS

The level is an administrative decision, but it has to be based upon what the traffic can

bear and also what target sectors/groups are covered. The pre-emption level originally

was one-third of total net bank credit (NBC) in the 1970s, but later was revised to 40 per

cent of NBC in early 1980s. The total pre-emption of banking resources, including PSL,

of about 70 per cent now looks too much indeed in a liberalised financial regime.

The Narasimham Committee of 1991, which went into the issue of directed credit,

observed after drawing attention to the problem of low and declining profitability, that


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there was a need for gradual phasing out of the directed credit programme, and that the

proportion should be fixed at 10 per cent of the aggregate credit to cover the really

needy and poor.

This recommendation was not heeded by the Reserve Bank or the government. A

similar approach for redefining the sub-targets was made by the recent Nair committee,

stressing the need for flow of credit to small and marginal farmers and micro

enterprises. This also went unheeded.

The original thrust was given to agriculture, small industries and exports, with additions

of small road and water transport operators and self-employed, which was sustained till

the late 1980s.

But, this thrust has been completely diluted because of demands of the banking system

to sustain its profitability and meet tighter prudential standards since the beginning of

1990s.

What is more pertinent is that the framework defining the sectors dimensions and

scope and the quantitative norms for measuring compliance by banks have undergone

metamorphic changes since its inception, rendering the concept rather kaleidoscopic.

Another dimension is that the prescriptions are specific to particular class of banks, in

particular public sector, private and foreign banks. In spirit, because of its social

purpose and its quasi-fiscal nature, public sector banks bear the brunt of such pre-

emptions, explicitly or implicitly.

The problem with the present priority sector guidelines is its multiple and complex

categorisation, incorporating several objectives, viz, growth, employment, and equity.

There are sectoral classifications combined with beneficiary-oriented categorisation.

The added complexity also comes from bifurcation of direct and indirect financing under

major categories. Since there is an overall target, despite sub-targets, and because of

complexity of categorisation, banks are able to comply with priority sector norms,


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effectively diluting the thrust of policy over direct credit. The new base of adjusted net

bank credit (ANBC) also overstates compliance with PSL compared with the earlier

NBC.

NEED FOR A NEW APPROACH

The PSL guidelines incorporated in the master circular updated up to June 2010 were

reportedly an amalgamation of about 22 circulars issued from 1977 onwards. After the

recent Malegam report and M.V. Nairs report, this has undergone further complex

changes as late as up to September 2012.

Despite the avowed intention of banking outreach and touching vulnerable groups of

population, priority sector targeting, as per the present framework, has left the major

part of the population untouched. This has led to the parallel development of new policy

initiatives in financial inclusion and gaining of momentum of alternative credit delivery

models such as the microfinance movement. These changes have not been recognised

and integrated into the approach towards PSL.

It is imperative that the priority sector should be redefined more from the standpoint of

growth and employment, and the equity angle should be left to be best served through

the policy of financial inclusion. Mostly, it could include sectoral classification, leaving

the beneficiary oriented groupings to be served by financial inclusion strategy.

If one follows this principle, infrastructure financing should gain a significant priority and

innovative ways should be explored to allow the banking system to finance

infrastructure, while agriculture and micro enterprises should continue to receive

attention.

But, the level and sub-targets should be rearranged to cover really the vulnerable

groups as recommended by the Narasimham committee, and recently by the Nair

committee. It is not the medium and large farmers who commit suicide but the small and

marginal ones. It is not the small and medium enterprises as a whole that suffer


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constraint of credit but it is mostly, as the economic census shows, the micro

enterprises.

GROWTH AND EQUITY ANGLE

Directed credit also implicitly gave a continued life to the operation of credit channel of

monetary policy, along with increasing prominence of the interest rate channel since the

reforms of 1990s. But, the priority sector guidelines, which form the basis of exercising

this policy, have lost their initial thrust both from growth and equity angles.

Reprioritisation is expedient also from the angle of minimising the adverse shocks

emanating from monetary and external shocks and to ensure credit flow to really

vulnerable groups.

The sacrifice of growth for containing inflation and the cost of correcting adverse

redistributive effects of inflation need not be that large, if reprioritisation of directed

credit is strategically attempted.

(This above article was published in BUSINESS LINES on 8 th nov 2012)

(The author is Director, EPW Research Foundation.)


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CHAPTER 6- PROBLEM AND SHORTCOMING OF PRIORITY SECTOR

LENDING IN INDIA

6.1 Basic Problems and Shortcoming Of Priority Sectors

Despite a remarkable growth of priority sector lending by the commercial banks in

recent years, some basic problems and shortcomings are found in this system during

the course of study.

1 Unduy broad based classification of priority sector: Under the existing system,

the classification of priority sector advances has remain broad-based, so that even big

borrower could avail of the benefits of priority treatment provided by the banks.

2 Need to identify priority sectors appropriately: It is necessary to identifyappropriate sectors with in the priority sectors on a rational basis. So that preferential

treatment can be availed by defined and targeted persons.

3 Need to examine the viability of project under priority sectors: while granting

credit to artisans, cottage industries, etc., the bank should also examine the

viability of the marketability point of view if not so this loan will poses the problem

of recovery for the banks.

4 Efficacy: There is always the problem of ensuring the effective end use of the

loans given to the priority sectors.

5 Need to re-look at target: There is a time need to review the target fixed at the

inception of scheme, for example 40% of total bank credit to priority sector and other

sub-targets. At present time it should be revised on rational basis.

6 The problem of bad debt: Another problem is the problem of bad debt arising

from indiscriminate lending by banks, keeping an eye on the fulfillment of the stipulated

targets.

6.2 Some Problems Faced By Banks In Financing Weaker Section

Increasing N.P.A.

Political issues


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High over dues

6.3 Problems Faced By Weaker Section

High rate of interest on loan

Lack of financial knowledge

Cumbersome process of getting loan

Bank staff is not cooperative

Lack of security of collateral

Fear factor about recovery process.


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SUGGESTIONS AND CONCLUSION

Priority sector bank lending has been an instrument of Indias financial policy which

aims at restoring sectional balance within credit disbursement and for channelling

credit to the weaker sections within these sectors. The Bank Company Acquisition Act

1969 leading to the nationalization of the 14 commercial banks has implicitly made it

clear in its preamble. There has been a substantial reorientation of banking policy after

the nationalization of banks in 1969. This has been accomplished through social

orientation of banking and administrative intervention. The objective underlying the

priority sector lending relates to ensuring the assistance from the banking system flows

in an increasing measure to those sectors of the economy which though contributing

significant proportion of national product 157have not received adequate support of

institutional finance in the past. More than 70 percent of borrowing by cultivators was

from informal sector. Commercial banks directed their lending towards large industrial

houses. Agricultural sector, small scale industries and weaker sections were neglected

because of both risk factor and urban bias. Thus there was need for ensuring equitable

and purposeful distribution of credit keeping in view the relative priorities of

development needs. Targets and sub-targets financing of specific sectors has been

envisaged. The share of priority sector in total bank advances is 40 percent sub-targets

for agriculture and weaker sections are fixed at 18 percent and 10 percent of total

advances respectively. The interest rate policy under priority sector and non-priority

sector has been stipulated.

Quantitatively, public sector banks have progressed well in priority lending but

their qualitative aspect is to be evaluated. For instance over dues, bad debts and

NPA have been serious problems faced by the bank in respect of advances made

to the weaker sections of society private sector banks are lagging behind in PSL

progress. There is a need to revise time to time the targets and sub-targets set by

RBI for this scheme. Projects under PSL should effectively checked and evaluated

for the purpose of viability and efficacy. There is the problem of delay and


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redtapism in the releasing of loan according to a substantial number of

respondent borrowers of priority sector loans. The commercial banks in the

study area have been found to be taking 1 to more than 3 months time before

releasing the loan amount. Such delay is highly frustrating for the borrowers.

There must be a time limit within which the197whole process of scrutiny of

applications is completed. For under recovery of dues and NPA (Non Performing

Assets) in case of weaker section advances, suggestion is, A special model like

micro financing (Bank linkage self help group) be formed, as in this model recovery

rate is nearly 95%. Projects for small scale for infrastructure development in villages

like road construction, electricity, drinking water and primary education projects should

be preferred under priority sector lending and special sub-targets be set for these

schemes. The priority sector loans provided by the commercial banks have been

more in favour of farm sector compared to other priority sectors. Thus there is

imbalance in the distribution of loan amount among the borrowers belonging to

different priority sectors. This imbalance needs to be overcome by providing an

equitable distribution of loan to the different priority sectors. There is need for the

borrowers to improve their skills through training prior to obtaining the sanctioning of

the priority sector loan so that they can use loan productively and repay them. Priority

sector loans at low rates of interest should be given only to weaker sections and not

to the affluent under the label of priority sector. This will help banks to improve

monitoring and supervision of these advances on the weaker sections and their own

profitability.

A separate segment of banking operation Banking for weaker section be created

and result of banks be highlighted with this segment. Interest rate should be reduced &

subsidized. Financial education for weaker section be spread with more involvement of

educational institutions.

priority sector lending in india

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